Currency wars to dominate IMF, G7 meets

LONDON: The risk of a full-blown global 'currency war', with the United States and China as the main combatants, will dominate the annual meeting of the International Monetary Fund and G7 in Washington.

IMF chief Dominique Strauss-Kahn set the tone before the start of the meeting on Friday, warning that the global recovery is still fragile. "There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery," he said.

The prospect of currency wars, where countries engage in competitive devaluation of their currencies to stimulate exports and the creation of jobs, has become a major concern in recent weeks.

At the centre of the debate is China, which has refused to allow its currency to appreciate quickly, warning of domestic social unrest if it were to do so. The US, in turn, has accused China of 'stealing' American jobs by artificially keeping its currency devalued, making its exports cheaper. China allowed the yuan to appreciate to its highest level on Friday, jut before the crucial meeting.

Last week, Japan and Brazil took steps to weaken their currencies. The Bank of Japan announced measures to keep the yen down while Brazil doubled its tax on inflows of hot money, or short-term capital, to keep the real competitive. Brazil's finance minister Guido Mantega coined the phrase 'currency war'.

The US is trying to garner global support, including moving discussions about global currency coordination from the G20 to the IMF, in its effort to get China to ease up on the yuan. Treasury secretary Timothy Geithner, in the run-up to the annual meeting, argued that the currency issue has to be tackled forthwith.

IMF's Strauss-Kahn has said that the international body is the right place to make progress on the currency question but it remains to be seen if all 187 central bankers and countries in Washington agree.

Emerging nations are not very keen to range themselves in this battle. Finance minister Pranab Mukherjee said while it is a matter of concern for global recovery, he urged countries to aim for consensus as the way forward.

The US move to shift the debate to the IMF could be fuelled by the fact that South Korea, the current president of the G20 is, along with nations like Brazil, Thailand and Taiwan, facing the prospect of asset price bubbles created by foreign money flows to emerging nations.

The European Central Bank recently weighed in on the US side, given a rising euro, though the Bank of England refrained from announcing further economic stimulus measures this week.

The US has unilaterally tried to pass trade sanctions against China, allowing American companies to seek import duties on Chinese exporters using an artificially weak currency, a move which China has condemned as protectionist.

The US Fed is also doing its bit to intervene in its currency, with repeated rounds of stimulus packages. Jobless data on Friday showed unemployment still at around 9.6%, dramatically increasing expectations that the Fed will announce what is known as QE2 — Quantitative Easing Round II, which essentially consists of pumping cheap money into the system as an economic stimulus.

"We think data like this augur for some additional stimulus measures from the Fed not too far down the road. An unemployment rate of 9.6% will not be considered acceptable," said John Velis, of London-based Russell Investments. The dollar traded near an eight-month low against the euro on Friday, before rebounding in later trade.

For now, analysts do not expect any consensus from the Washington round of meetings on the critical currency question.